New BOJ governor: Dove, hawk… or owl?

As discussed below, the upcoming “changing of the guard” at the Bank of Japan (BOJ) could have some meaningful investment implications — and not just for Japanese assets — of which global allocators should be mindful. 

A surprise nomination for Bank of Japan governor

Kazuo Ueda has been officially nominated to take the helm of Japan’s central bank when the incumbent BOJ governor, Haruhiko Kuroda, steps down in April 2023. Ueda will be accompanied by two deputy nominees: Shinichi Uchida, the BOJ’s current executive director, and Ryozo Himino, the former chief regulator for the Financial Services Agency (FSA) of Japan.

Ueda’s nomination came as a surprise to many observers after much prior speculation had focused on “Kuroda continuity” candidate Masayoshi Amamiya. While the Amamiya headlines provoked brief, dramatic near-term moves in the Japanese yen, the longer-term impacts of a new trio navigating the BOJ’s nine-member board could be greater and more far-reaching, especially given that Japan has been an anchor of sorts for the global fixed income markets for some time now. 

What matters most

Ueda and his deputies portray an overall impression of balance, with the soon-to-be BOJ governor poised to take the central bank’s reins and perhaps mimic the stance of Christine Lagarde, who began her tenure at the European Central Bank (ECB) with a promise to be neither a hawk nor a dove, but rather an “owl” (i.e., wise and data-dependent). Time will tell. Also important will be: 

• Prime Minister Kishida’s overarching goal through this BOJ appointment, which is likely to pivot away from the Abe-Kuroda era. We anticipate that the new regime will probably place less emphasis on ideology (read: no longer “reflation at any cost”) and more on data dependency. 
• Whether an exit from ultra-loose policy will ultimately be down to the data, which has been improving. Most domestic analysts view the recent spike in Japanese inflation as “transitory” and are thus forecasting only a gradual BOJ exit. But Japan’s stronger economic data of late appears to be challenging that narrative, with wages rising, workers gaining pricing power, and inflation potentially staying “stickier” than expected.

The sustainability of Japan’s wage growth and inflation will be key indicators to monitor into the second half of 2023. We think the improving data momentum will persist and be the main trigger for further BOJ policy adjustments, including potential removal of both yield curve control (YCC) and negative-interest-rate policy (NIRP).

Investment implications of BOJ governor change

With markets counting down to Ueda’s assumption of the BOJ governorship in April, we believe there’s a reasonable likelihood of further increases in Japanese government bond (JGB) yields in the period ahead. If so, that could have implications for global risk assets, given the BOJ’s status as a perceived “last resort” provider of global liquidity. 

While both the Swiss National Bank (SNB) and the Bank of Japan (BOJ) have been longtime adherents to NIRP, the Swiss franc (CHF) has reversed course and strengthened versus a broad basket of developed market currencies since the SNB dropped NIRP in mid-2022. Similarly, the BOJ’s potential abandonment of NIRP at some point could prompt a positive turn in market sentiment toward the Japanese currency in the coming months, considering that both Switzerland and Japan are among the world’s largest net-creditor nations.

We believe the tightening in global liquidity conditions that began last year represents a tectonic shift in the investment environment. So far, however, the BOJ has bucked the policy tightening trend pursued by other major central banks by being forced to aggressively step up its JGB purchases in defense of its self-imposed yield cap for long-term debt (Figure 1). While the BOJ’s asset purchases have continued to materially influence both global interest rates and risk assets in the short term, we believe its YCC policy is ultimately unsustainable. 

Any BOJ policy changes from here would likely increase global rate and currency volatility, particularly any policy actions that might affect global capital flows — for example, anything related to Japanese investors’ overseas fixed income allocations and/or foreign investment into Japan.

Figure 1

Related content

• Japan’s economic recovery (February 2023)
• Why global investors should watch the Bank of Japan (January 2023)
• Could Japan face a UK-style pension crisis? (January 2023)